As the glob­al hege­mon, the Unit­ed States once cham­pi­oned free mar­kets and democ­ra­cy. Trump 2.0 has torn up its prin­ci­pal trade agree­ments and is ar­guably do­ing the same to its po­lit­i­cal and ed­u­ca­tion­al in­sti­tu­tions.

These ac­tions have cre­at­ed un­cer­tain­ty. Trump’s tar­iffs have in­creased the US’s ef­fec­tive av­er­age tar­iff rate from 3 per cent to clos­er to 15 per cent. Sec­toral tar­iffs on lum­ber, semi­con­duc­tors and phar­ma­ceu­ti­cals could in­crease the ef­fec­tive ap­plied tar­iffs when an­nounced.

A trade agree­ment is a for­mal (le­gal) arrange­ment be­tween coun­tries that es­tab­lish­es the frame­work to guide and in­form mu­tu­al trade flows. The pur­pose of a for­mal frame­work is to make the trad­ing arrange­ments be­tween coun­tries more pre­dictable and, os­ten­si­bly, eas­i­er, and cheap­er.

Key fea­tures in­clud­ed in these agree­ments are tar­iffs, non-tar­iff mea­sures, mar­ket ac­cess com­mit­ments, stan­dards and reg­u­la­tions and dis­pute res­o­lu­tion mech­a­nisms. Typ­i­cal­ly, these arrange­ments are ex­treme­ly de­tailed and re­quire sev­er­al months, if not years, to suc­cess­ful­ly con­clude ne­go­ti­a­tions.

The sub­stance and le­gal form of the trade deals an­nounced by the Trump ad­min­is­tra­tion raise ques­tions about whether they qual­i­fy as tra­di­tion­al trade agree­ments. The deals with the EU, Japan, South Ko­rea, and oth­ers amount to mem­o­ran­da of un­der­stand­ing (MOUs), non-bind­ing po­lit­i­cal com­mit­ments rather than rat­i­fied treaties. 

For ex­am­ple, the EU and Japan trade deals in­clude pledges for in­vest­ments in the US ($600 and $500 bil­lion, re­spec­tive­ly). How­ev­er, the in­vest­ment modal­i­ties are un­clear. Does rein­vest­ment of re­tained earn­ings count? Is the in­vest­ment in the form of new cash in­jec­tions as dis­tinct from bor­row­ing (do­mes­tic or for­eign)? The EU clar­i­fied that it can­not force pri­vate com­pa­nies to ful­fil these in­vest­ment promis­es.

In ef­fect, through these arrange­ments, coun­tries con­cede the US’ right to im­pose uni­lat­er­al tar­iffs on their ex­ports un­der the threat of im­pos­ing high­er tar­iffs. This de­stroys the prin­ci­ple of reci­procity, the re­quire­ment that a WTO mem­ber coun­try must treat all mem­bers equal­ly in in­ter­na­tion­al trade (Most Favoured Na­tion prin­ci­ple). This has ef­fec­tive­ly killed the prin­ci­ple of free trade.

The US Con­sti­tu­tion em­pow­ers Con­gress to set im­port tar­iffs and to reg­u­late com­merce with for­eign na­tions. MOUs or ex­ec­u­tive or­ders have been used to im­ple­ment these rec­i­p­ro­cal tar­iffs to fa­cil­i­tate the use of pres­i­den­tial ex­ec­u­tive pow­er in an emer­gency un­der a pro­vi­sion in the In­ter­na­tion­al Emer­gency Eco­nom­ic Pow­ers Act (IEEPA). This is a le­gal short­cut de­signed to by­pass con­gres­sion­al ap­proval. How­ev­er, there are two le­gal chal­lenges to the use of pres­i­den­tial ex­ec­u­tive pow­ers us­ing this mech­a­nism. The chal­lenges could po­ten­tial­ly re­shape the US con­sti­tu­tion­al land­scape around the ex­er­cise of pres­i­den­tial au­thor­i­ty.

The first le­gal chal­lenge is VOS Se­lec­tions Inc v Trump. This is a con­sol­i­dat­ed case com­bin­ing that of a small im­porter with law­suits filed by var­i­ous states. This case is be­ing tried in the US Court of In­ter­na­tion­al Trade (CIT), a spe­cialised court with ju­ris­dic­tion over cus­toms and trade mat­ters.

The sec­ond, Learn­ing Re­sources Inc v Trump, is be­fore the US Dis­trict Court for the Dis­trict of Co­lum­bia. These cas­es are busi­ness dis­putes, but al­so hinge on the wider prin­ci­ple of the lim­its to ex­ec­u­tive pow­er. This ex­plains why var­i­ous states and trade as­so­ci­a­tions have joined the le­gal ac­tions.

Both courts ruled that the tar­iffs is­sued by Pres­i­dent Trump un­der the IEEPA were un­law­ful. The CIT ruled that the “trig­ger­ing” emer­gency bore no ra­tio­nal con­nec­tion to the trade mea­sures im­posed, while the DC Dis­trict Court went fur­ther. It held that the IEEPA does not men­tion tar­iffs and was nev­er in­tend­ed as a tool for re­shap­ing glob­al trade and there­fore can­not be in­voked to au­tho­rise the use of tar­iffs.

The Trump ad­min­is­tra­tion has ap­pealed both rul­ings. The tar­iffs will re­main in force while the ap­peal is heard. Pend­ing a fi­nal de­ci­sion, the le­gal ba­sis for the tar­iffs is shaky.

These de­vel­op­ments are of crit­i­cal in­ter­est as the US is Trinidad and To­ba­go’s largest trad­ing part­ner, ac­count­ing for ap­prox­i­mate­ly 40 per cent of to­tal ex­ports and 40 per cent of im­ports. The im­po­si­tion of a 15 per cent tar­iff could dele­te­ri­ous­ly im­pact T&T’s ex­port com­pet­i­tive­ness.

Petro­chem­i­cal ex­ports (Am­mo­nia, Urea, Methanol) and all non-en­er­gy ex­ports to the US are now sub­ject to the new 15 per cent tar­iff. Sec­ond, am­mo­nia is one of T&T’s ma­jor ex­ports, with ap­prox­i­mate­ly 25 per cent go­ing to the US mar­ket. Ex­port vol­umes to the US mar­ket have been falling as new US am­mo­nia plants are more com­pet­i­tive and nat­ur­al gas in­puts cheap­er. Low­er gas through­put vol­umes in T&T plants and the tar­iff put T&T ex­ports at a dis­ad­van­tage.

Low­er mar­gins or low­er ex­port vol­umes will hurt T&T’s shal­low eco­nom­ic re­cov­ery, and ex­ac­er­bate the cur­rent crit­i­cal forex po­si­tion. Al­so, the im­pact of tar­iffs on the US econ­o­my can in­di­rect­ly af­fect the T&T econ­o­my be­cause the US is our largest trad­ing part­ner. Any neg­a­tive im­pact in the US could have a knock-on ef­fect here. For ex­am­ple, if these new tar­iffs in­crease US in­fla­tion as is wide­ly ex­pect­ed, this could lead to im­port­ed in­fla­tion. Sim­i­lar­ly, if the Fed­er­al Re­serve rais­es in­ter­est rates, it will af­fect do­mes­tic mon­e­tary pol­i­cy.

These are chal­leng­ing and un­cer­tain times, and the pol­i­cy de­ci­sions to ad­dress the chal­lenges are com­pli­cat­ed. Re­ly­ing on an over­val­ued ex­change rate sucks in im­ports, drains the re­serves and hurts do­mes­tic in­dus­try. Will the Min­is­ter of Fi­nance make the tough de­ci­sions re­quired to ad­dress fis­cal pol­i­cy, the size of the deficit, and in­cen­tivise a new path to eco­nom­ic growth?

Mar­i­ano Browne is the Chief Ex­ec­u­tive Of­fi­cer of the UWI Arthur Lok Jack Glob­al School of Busi­ness.